Mexico central bank has more reason to cut rates after low Aug inflation

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MEXICO CITY (Reuters) - Mexico’s central bank now has another reason to reduce its benchmark interest rate again this year, as annualized inflation cooled in August to a nearly three-year low and the economy has struggled to pick up steam.

Several analysts raised their bets for a rate cut after inflation eased to 3.16% in August, undershooting the 3.20% consensus forecast of economists polled by Reuters poll and taking the headline rate to its lowest since October 2016.

Last month the central bank, known as Banxico, cut its benchmark lending rate for the first time since June 2014, pointing to slowing inflation and increasing slack in the economy, and fueling expectations that further rate cuts could be coming.

Banxico, which holds its next monetary policy meeting on Sept. 26, targets an inflation rate of 3%, with a one percentage point tolerance range above or below that figure.

“August inflation showed a clear convergence towards Banxico’s target and increased the probability of a cut this month,” Banorte analysts, led by Gabriel Casillas, said in an research note.

Markets expect Banxico will follow in the steps of the U.S. Federal Reserve, at a time when virtually all major central banks around the globe have lowered their rates. The Fed’s next meeting is Sept. 18.

“The Fed futures markets are pricing in between 2-3 cuts this year. Similarly, the ECB is expected to cut rates in September and restart their QE program,” said Maneesh Deshpande, U.S. Equity Strategist at Barclays.

As central banks cut interest rates, Mexico’s policymakers still have room to lower borrowing costs by as much as 100 basis points before the peso becomes less attractive than other currencies, fund managers and financial analysts say.